Capital Gains Tax Breaks and The Coming Small Business Investment Boom

Showing once again where our modern media priorities are, shoved off the front page last week by more lurid Tiger Woods talk, was the very under-reported but potentially game-changing proposal that President Obama made last week regarding eliminating all capital gains taxes on startup and small business investments.

There are so my ways that this is good for small business, for America, and for private company investing. Let me note three:

1. Simple Fairness. It has been a very tough couple of years for startups and small businesses. Unlike automakers and big banks, the nation's entrepreneurs were left to completely fend for themselves through the recent economic tsunami.

And, as befits a class of people that can only be described as modern-day action heroes, given their massive and unsung contributions to the American way of life, the entrepreneurs among us have handled their adversities as they always do - with stoicism, with grace, and with the simple coda that nothing is immutable to hard work.

But it is beyond time that someone lend them a hand. If, miracle of miracle, Congress follows the President's lead and makes this proposal law (and given how lower capital gains has been a Republican mantra since I was in high school, the probability is high that it will), it will unleash a huge investment bull market across the entrepreneurial landscape.

And let's not forget how overdue this is - for the 1st time in history this last decade will go down as the only one where more money was invested INTO venture capital than was earned out. While early-stage private equity investing did much better in the decade than VC's, it has still been a very rough go of it.

The hope here is that this tax break will be a catalyst for capital move from do-nothing and know-nothing investments like gold and into productive ones like technology startups and small businesses.

2. Startup and Small Business Tax Breaks Spur Innovation. The proposed capital gains tax break, when coupled with the proposed tax credits for small business hiring and investment, will provide a much-needed boost to entrepreneurial risk-taking and innovation.

Remember, this information age of ours is a story of "guys in garages." Gates and Allen, Jobs and Wozniak, Page and Brin.

Similarly, the big ideas of the coming "Energy Age" - in battery technology, in cold fusion, in greenhouse gas reversal, will NOT come from the federal government or big business.

Why? Because very simply the most creative people do NOT want to work within any kind of bureaucracy. Rather, they will come from the yet to-be-founded startup, that fluid and flexible small business about to break-out.

Anything that makes it easier for these innovators to have cheaper access to capital - which a waiver of the tax on capital gains effects - is a HUGE positive.

3. Let's Get the Best and Brightest to be More Entrepreneurial. Finally and tied to this point, the central economic and investment issue of our age is not inflation, it is not big bank bailouts, it is not health care reform, it is not Democrat versus Republican and it is not liberal versus conservative.

No, it is what can and needs to be done to spur the "best and brightest" among us to be more entrepreneurial and more successful when they are.

Why? Because entrepreneurs create the innovations that create the jobs that create the wealth that create our whole, cherished American way of life.

So we need everyone in positions of influence in our society - government, media, education, entertainment - to stand-up for the entrepreneurs.

The proposed capital gains tax break in this context is as important in what it signals as its direct stimulus effect.

And for you investors out there, the best thing is that if YOU do the best thing for the economy and the country and invest in entrepreneurs, well guess what?

If you do it right, you will make far more on your money that you could ever imagine.

This is called doing well while doing good. And it is highly recommended. I look forward to your attendance and feedback.

This is a moronic article. First, Obama is doing far more harm than good with his deficit spending and his favored industries. Second, "FAIRNESS" is a word used by looters and thieves. The only fair thing the government can do is remove themselves from the economy and let the best companies survive, whether they are start ups or corporations. Third, tax breaks do not spur innovation, taxes destroy innovation. What the government should do is slash taxes across the board, no favoritism for any person or company or industry. Finally, entrepreneurs should be entrepreneurs. The best and brightest don't need government policy.

Posted at 9:44 am

al browne says

Build a fire under the SBA and extentd 5 yr interest free start up loans for small businesses of $100,000 or less. Interest to acculumate and be added on the back end when they are up & running sccessfully

Posted at 9:06 am

rick says

i'm not sure i agree with either of the 2 folks above. eliminating the cqpital gains taxes helps businesses across the board, not just certain industries. also giving sba loans to just start up businesses does nothing for those businesses that are already started and unable to expand because of lack of capital. make it easier for investors to invest in business period.

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danley says

Because capital gains taxes aren't imposed until an asset is actually sold and gains are realized, they encourage those who have accumulated wealth to conserve it and have debt solutions. This reduces the flow of venture capital, which is the lifeblood of new entrepreneurs.

Posted at 3:08 pm

Mike says

Capital gains taxes protect those who have inherited money and those who knows how to make money online because such recipients can live off their family's accumulated capital without having to pay tax on it. Thought of another way, capital gains taxes aren't a tax on the rich; they’re a tax on getting rich.

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According to rocket spanish review in an effort to help small business, entrepreneurship, long-term investment, and overall economic growth, Congress reduced the tax rates on capital gains in 2003 from 20 percent to 15 percent for most investments held 12 months or longer. The rate for investors in the two lowest tax brackets fell from 10 percent to 5 percent. These changes are effective through 2011.

Posted at 3:14 pm

James K. says

As you might expect, many people who knows how to fight oppose capital gains tax relief because they believe cutting the taxes further benefits the extremely wealthy. While this may be true, cutting the capital gains tax does present some benefits to the less than wealthy as well.

Posted at 3:16 pm

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When mutual funds profit by selling some of the stocks in their portfolio, they pass along the gains to their shareholders in the form of a capital gains distribution. The investors then have to pay the capital gains taxes on such distributions, which typically occur annually. Even though mutual funds don't distribute the gains, the shareholders still have to pay taxes on the fund's realized capital gains.
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The effect of capital gains on a business will depend on the nature of the business. If the business is an investment company, the effect could be significant because capital gains are an issue every time an investment asset is bought or sold. In other businesses like puppy potty training the capital gains may not have a large effect on day-to-day operations.

Posted at 3:24 pm

Alton Bell says

Are capital gains the only policy issue impacting investment, entrepreneurship, and the economy? No, but they do matter a great deal. When the Tax Reform Act of 1986 increased capital gains taxes from 20 percent to 28 percent, venture capital investment stagnated until the taxes were reduced in 1997. Over the years, capital gains realizations and the taxes paid on those gains have tended to increase following a cut in the capital gains tax rate.
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Because capital gains taxes aren't imposed until an asset is actually sold and gains are realized, they encourage those who have accumulated wealth to conserve it and have debt solutions. This reduces the flow of venture capital, which is the lifeblood of new entrepreneurs.
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Showing once again where our modern media priorities are, shoved off the front page last week by more lurid Tiger Woods talk, was the very under-reported but potentially
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Capital gains are profits reflecting increased values of stocks, bonds, investment real estate and other "capital assets." Capital gains are treated much more favorably than other types of income, especially for the highest income people. In fact, total current capital gains loopholes are estimated to cost $258 billion over the next seven years. In terms of cost and maldistribution--and contentiousness--tax breaks for capital gains are at the top of the list.
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